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Obamacare and the Fiscal Cliff

Jan. 4, 2013
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Is the ACA As Safe As They Say?

  • The deal reached by Congress on Jan. 1 puts off massive budget cuts for just two months.
  • Even if the fiscal cliff-related cuts are avoided permanently, some measures of the Affordable Care Act (also known as ObamaCare) are vulnerable to budgetary cuts in the future.
  • The ACA is a widespread, complex web of reforms, and cutting funding for portions of it could place the success of the entire Act in jeopardy.

President Obama’s reelection means that the Affordable Care Act isn’t likely to be repealed.  Yet, while many breathed a sigh of relief on election night for this reason, just because the legislation is here to stay does not necessarily mean the ACA will be able to safely and smoothly achieve its goals—or that we’ll be able to pay for it.

The fiscal cliff deal reached by Congress on New Years Day 2013 delayed the drastic mandatory federal spending cuts known as “sequestration” for two months. But it didn’t eliminate the possibility that legislators will have to slash $100 billion from the budget if a permanent solution isn’t reached. A total of $54.6 billion of sequester cuts would come from federal direct non-defense spending. Some areas of the U.S. health care system would specifically be cut—for instance, the plan calls for an $11 billion cut from non-administrative spending associated with Medicare.

Portions of the ACA are vulnerable to sequester cuts—other parts are safe because of the terms of the budget legislation. The exact areas of the Act that are and are not open to sequester cuts is a topic of debate among lawmakers—news accounts from summer 2012 showed Senate Republicans claiming they had found 15 portions of the ACA vulnerable to cuts, with the Office of Management and Budget only willing to concede “some of the funding could be vulnerable to cuts.”

Beyond possible direct cuts to the ACA itself, the planned cuts to other areas of the U.S. health care system raise questions of how the ACA’s reforms would fit into the much-changed landscape that would result from sequestration.

Even if sequestration is permanently avoided, other costly parts of the ACA—such as the expansion of Medicaid—have yet to be implemented, and it remains to be seen how the bills for the reforms will be paid in the belt-tightening budgetary atmosphere of fiscal cliff and debt ceiling negotiations.

Two of the largest areas of ACA spending which are vulnerable to budget cuts (whether automatically triggered by sequester, or otherwise) are:

  • Federal grants to states to help run exchanges
  • Cost-sharing subsidies

Federal Grants to States to Set up Exchanges

Exchanges are new marketplaces established by the ACA, where people who are not offered health insurance through their employer can buy coverage. The Congressional Budget Office estimates that 25 million people will eventually receive their health insurance through exchanges. Each state can choose to implement and run its own exchange, or it can allow the federal government to take responsibility for implementing and running its exchange.

If a state chooses to set up and operate its own exchange, the ACA provides funding in the form of grants to help states build and maintain their exchange.

If states do not want to set up the exchanges (or aren’t able to), they can revert to a federal model. That means the federal government assumes the cost of setting up and maintaining the exchange (as opposed to state-run exchanges where the federal government covers part of the costs via grants).

The Department of Health and Human Services (HHS) has already parceled out Round One Grants, which are for exchange planning, although many states have said they intend to eventually repay all or part of the money. The implementation period began in 2011, making grant funding available on a rolling basis supposedly until 2014.

The deadline for states to submit plans to the HHS saying they wanted to run their own exchange was Dec. 14th 2012. A mere 18 out of 50 submitted plans. The rest appear to be going with a federally run model.

One such state, Iowa, is citing a high price tag as a reason not to build a state-run exchange. The governor’s office pointed to numbers from the HHS that pegged the cost of a state exchange at $646 million for fiscal years 2013-2020, while the cost of a federal exchange was just $176 million. In Iowa’s view, it’s a clear win – the federally run exchange will save taxpayers $470 million. Some lawmakers are proclaiming the Affordable Care Act unaffordable for states: Rep. Phil Roe (R-Tenn.) claimed the law doesn’t give states the flexibility they need to ensure the exchange meets its population’s specific needs, adding the Act’s envisioned expansion of Medicaid would be financially disastrous to states.

Cost-Sharing Subsidies

The exchange system won’t force individuals who can ill-afford to purchase health care to pay entirely out-of-pocket. The ACA establishes two different types of subsidies to help individuals pay for coverage: premium subsidies and cost-sharing subsidies. Premium subsidies are exempt from sequester cuts, because they are provided in the form of tax credits, rather than direct federal spending. Premium subsidies are available for people with income ranging from the federal poverty level to four times the FPL ($11,170-$44,680 for a single person or $23,050-$92,200 for a family of four in 2012).

But cost-sharing subsides are not exempt. Cost-sharing subsidies are available to people with income ranging from the federal poverty level to 2.5 times the FPL ($11,170-$27,925 for a single person or $23,050-$57,625 for a family of four in 2012). Cost-sharing subsidies are paid by the federal government to insurance companies in order to essentially make up the difference between the amount the insured person is paying for coverage, and what the coverage is “worth.” The worth of the insurance is calculated via actuarial value, meaning the amount of health care costs the insurance covers. A plan with an actuarial value of 70% pays 70% of your health care costs, leaving you to cover the remaining 30% through co-pays, deductibles, etc.

As the Kaiser Family Foundation explains: “How these cost-sharing subsidy reductions [triggered by automatic budget cuts] would actually filter through the system is complex and somewhat unclear. The ACA entitles low-income exchange enrollees to coverage with a higher actuarial value, and it requires participating health insurers to provide that coverage. The federal government then pays insurers directly for the extra costs associated with lower patient cost-sharing. […] So, the direct effect of a triggered budget cut would be that low-income enrollees would still get improved coverage, but insurers would be paid less for providing that coverage. Insurers probably would try to recoup these losses by charging higher premiums (which would, in turn, also lead to higher federal tax credits). This might also make private plans reluctant to serve lower-income enrollees, and they could take steps to try to avoid that part of the market.”

So: while it’s too early to quantify the real impact, slashing cost-sharing subsidies intended to help people buy insurance wouldn’t actually result in them not receiving that coverage, but it potentially could push health insurance costs higher for everyone, in turn leading to additional tax credits, which would then skew tax estimates for the cost of the reform measures overall. It’s clear that budget cuts on parts of the ACA will never exist in a vacuum, and that cuts have the power to dramatically alter the effects of the Act’s healthcare overhaul.

Unintended Consequences to Come?

The ACA is an intricate web of changes that attempts to reengineer the massive and entrenched U.S. health care system. Changing key factors without considering the consequences won’t just mean a different version of ObamaCare—it could mean no functional reform system at all.